Europe takes another chunk out of Qualcomm profits

The European Commission has announced it will once again fine Qualcomm for market abuse, with the investigation this time focusing on 3G baseband chipsets.

It seems time does not heal all wounds as this investigation focused on market abuse between 2009 and 2011, and a concept known as ‘predatory pricing’. In short, Qualcomm used its dominant market position to sell products to strategically important customers, below cost price, to effectively kill off any competition before it had a chance to gain momentum.

“Baseband chipsets are key components so mobile devices can connect to the Internet,” said Margrethe Vestager, the Commissioner in charge of competition policy. “Qualcomm sold these products at a price below cost to key customers with the intention of eliminating a competitor.

“Qualcomm’s strategic behaviour prevented competition and innovation in this market and limited the choice available to consumers in a sector with a huge demand and potential for innovative technologies. Since this is illegal under EU antitrust rules, we have today fined Qualcomm €242 million.”

Although the European Commission affords the opportunity for companies to use market advantages to seek profits, but when it becomes anti-competitive the bureaucrats draw a line. This is what has happened in this instance.

At the time, Qualcomm controlled roughly 60% market share of the UMTS baseband chipset segment, three times as great as the nearest competitor, though this position was used to kill competition before it had a chance to emerge. Using its relationships with Huawei and ZTE, Qualcomm sold products at low enough prices no-one could compete.

This is the challenge with segments which have such high-barriers to entry, key customer accounts are critically important, such are the investments which need to be made in R&D. Qualcomm effectively created a loss leader of these products to stem the critical flow of funds into any competition which could develop from the smallest glimmer of hope. In this case, the firm in question was Icera, which was eventually acquired by Nvidia.

The fine in this case represents 1.27% of Qualcomm’s turnover in 2018 and will hopefully deter companies from engaging in anticompetitive activity in the future.

For Vestager, this is another parting shot as she wraps up her tenure in the competition policy office, a position she has held since 2014.

The Commissioner has built a reputation of taking on big tech who make a habit of practising in anti-competitive activities. Qualcomm has been a frequent combatant of Vestager, though she has got plenty of experience dealing with the likes of Google and Amazon also, the latter of which is the subject of the latest probe.

Assuming the tech giants will be happy to see the back of her would be very reasonable, though it remains to be seen who will replace the feisty and combative Vestager.

S&P prepares to downgrade Vodafone after spending spree

Standard & Poor’s has suggested it will downgrade Vodafone from its current ‘BBB+’ credit rating should the European Commission approve its acquisition of Liberty Global assets.

Vodafone has struck an agreement to buy Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania for €18.4 billion, including debt, though S&P believe this acquisition could put it in a slightly precarious position. With S&P suggesting approval for the transaction could be granted during the next three months, the firm has placed Vodafone on its Creditwatch list.

This acquisition is not the only factor S&P has taken into account, but it seems it will be straw heavy-enough to break the camels back. Aside from this purchase, the financial services firm has also pointed towards spectrum auctions and operational challenges in Spain, weaknesses in South Africa and the re-pricing saga in Italy as contributing factors. India has not been mentioned by the firm, but the on-going difficulties here should also be noted.

In short, S&P believes the firm might be getting a little bit too carefree with its spending.

The Creditwatch function of S&P effectively informs investors of the firm’s closer inspection of a business which is under-going some sort of change. Inclusion on the list can either be positive or negative, indicating whether the credit rating has the potential to go up or down, and in this case S&P feel Vodafone is heading in the wrong direction.

This is all very complicated, and unless you have an avid follower of spreadsheets, there is a blur of numbers and multiples to get your head around. However, this is not good news for Vodafone and will create a negative perception around the business when engaging investors.

Currently, Vodafone’s credit rating is ‘BBB+’, which isn’t necessarily the worst position to be in. A ‘BBB’ rating, any one of the three measurements included, suggests a company ‘has adequate capacity to meet its financial commitments’, though adverse market conditions could impact its ability to meet financial demands. Cutting through the noise, Vodafone has too much debt and poor performance could put it in financial strife; its spending too much money according to S&P.

Looking at the state-of-play for Vodafone, it could be better. There are of course markets where the trends are heading in the right direction, see the UK, but quite a few where it is facing challenges. These trends combined with financial outlay is not painting the prettiest pictures.

The acquisition of some Liberty Global European assets is a big commitment, while the business has also had to fork out €1.9 billion during the German spectrum auction. The Spanish and Italian auctions were also expensive for the telco, while there is another on the horizon in the UK. This is not the time exposure to spectrum auctions has been highlighted at Vodafone, RBC Capital Markets put out its own negative outlook in January.

That said, spending is not an issue if everything is going well. However, macroeconomic weakness in South Africa is decreasing consumer spending on mobile contracts. Considering this is largely a pre-paid market, this should be seen as a worrying trend. Iliad is continuing to cause chaos with aggressive pricing strategies in Italy and Spain is another operational difficulty after losing the rights for domestic football, hitting TV subs hard. As mentioned before, India has not been mentioned by S&P, but it appears the worst damage is in the past following the merger with Idea Cellular.

Vodafone has of course made effects to limit the negative impact. Dividends have been cut and cost-efficiency strategies have been set into motion, while integration costs of the Liberty Global acquisition should be offset by operational synergies. This is not to say Vodafone is going under at any point in the future, but it is a consideration creditors will have to take into account.

This is not the worst news Vodafone could have expected to hear, S&P has said it does not expect to downgrade the credit rating of the firm further, but it is far from good news. It is a slight dent to confidence in the business.

Facebook investors brush off leaked $5 billion fine

It has been widely reported that Facebook will receive a record fine for privacy violations, but investors seems strangely pleased about it.

All the usual-suspect business papers seem to have received the leak late last week that the US Federal Trade Commission voted narrowly to fine Facebook $5 billion for data privacy violations related to the Cambridge Analytica thing. The FTC, like the FCC, has five commissioners, three of which are affiliated to the Republican party and two the Democrats. As ever they voted on partisan lines, with the Democrats once more opposing the move.

The FTC has yet to make an official announcement, so we don’t know the stated reasons for the Democrat objections. But since that party seems to have decided it would have won the last general election if it wasn’t for those meddling targeted political ads, it’s safe to assume they think the fine is too lenient.

Just because the Democrats have a vested interest, that doesn’t mean they’re wrong, however. Of course Democrat politicians have criticised the decision, but many more independent commentators have noted that the fine amounts to less than a quarter’s profit for the social media giant. Nilay Patel, Editor in Chief of influential tech site The Verge, seems to speak for many in this tweet.

That Facebook’s share price actually went up after such a big fine initially seems remarkable, but all it really indicates is that Facebook had done a good job of communicating the risk to its investors, so a five bil hit was already priced in. The perfectly legitimate point, however, is that as a punishment one month’s revenue is unlikely to serve as much of a deterrent from future transgressions.

Patel seems very hostile to Facebook, stating in his opinion piece on the matter “Facebook has done nothing but behave badly from inception.” A lot of this bad behaviour consists of exploiting user data, but what is really under attack seems to be Facebook’s core business model and, to some extent, the whole-ad-funded model on which sites like The Verge rely.

Debates need to be had about the way the Internet operates and monetizes itself, but identifying Facebook as a uniquely bad actor when it comes to exploiting user data seems disingenuous. Laws and regulations are struggling to catch up with the business models of internet giants and there are many other questions to be asked about how they operate.

The fact that Facebook’s share price has now largely recovered from the Cambridge Analytica scandal of a year or so ago, as illustrated by the Google Finance screenshot below, indicates that investors consider these issues to be just another business risk, to be weighed up against obscene profits. While we have always considered the scandal to be overblown, it also seems clear that, as a meaningful punishment, even a $5 billion fine is totally inadequate in this case.

Facebook share price July 19

Vodafone top two take 20% bonus cut due to rubbish share price

Chief Exec Nick Read, and Chief Financial Officer, Margherita Della Valle are taking one for the team because Vodafone hasn’t been performing.

Vodafone’s share price is down 15% since the start of this year, 19% since Read took over at the helm and 44% since the start of 2018. Corporate tradition is for senior execs to get massive bonuses regardless of how badly their company is performing, while still attaching strict performance conditions to their underlings’ variable pay.

Possibly in anticipation of a looming shareholder meeting Read and Della Valle voluntarily requested the 2020 conditional share package they were recently awarded be cut by 20%. “This was requested to reflect the low valuation of the share price following its reduction over the year and particularly the change in value between the date of the Remuneration Committee’s decision in respect of the value of the Awards and the date of grant,” said the Vodafone announcement.

Of course they’ll still get 80% of the award so long as they meet whatever conditions are required for the payout. These weren’t detailed in the announcement but since they’re usually no more tricky than not resigning or getting sacked, let’s assume they’ll get them in full. So that means Read will get 3,887,636 shares and Della Valle 2,366,387, which equates to around £5 million and £3 million respectively.

You could argue that the dynamic duo inherited a lot of the aggro that has befallen them since they took over, such as the India situation. But Read was previously the CFO and Della Valle his deputy, so it’s not like they didn’t have a major hand in it. But they seems to be headed in the right direction in the UK, at least, so maybe they will look back on this moment as their nadir.

IBM and Red Hat seal the deal

The $34 billion acquisition of opensource enterprise software vendor Red Hat by venerable tech giant IBM has finally been completed.

The mega M&A was first announced last October and, given the size of it, seems to have gone through relatively quickly. Now begins the significant undertaking of integrating two such massive organisations that may well have quite distinct cultures.

IBM was founded in 1911 and has undergone several transformations to become the enterprise software and services company it is today. Red Hat only came into existence in 1993 and has always focused on the decidedly un-corporate open-source software community. IBM will be hoping some of its youthful vigour and flexibility will rub off, but that remains to be seen.

The official line is that the acquisition makes IBM one of the leading hybrid cloud providers as well as augmenting its software offering. There’s much talk Red Hat’s independence being preserved but, of course, it will now be taking orders from IBM.

“Businesses are starting the next chapter of their digital reinventions, modernizing infrastructure and moving mission-critical workloads across private clouds and multiple clouds from multiple vendors,” said Ginni Rometty, IBM chairman, president and CEO. “They need open, flexible technology to manage these hybrid multicloud environments. And they need partners they can trust to manage and secure these systems.”

“When we talk to customers, their challenges are clear: They need to move faster and differentiate through technology,” said Jim Whitehurst, president and CEO of Red Hat (what’s the difference?). “They want to build more collaborative cultures, and they need solutions that give them the flexibility to build and deploy any app or workload, anywhere.

“We think open source has become the de facto standard in technology because it enables these solutions. Joining forces with IBM gives Red Hat the opportunity to bring more open source innovation to an even broader range of organizations and will enable us to scale to meet the need for hybrid cloud solutions that deliver true choice and agility.”

That’s it really. There’s lots aspirational talk and general banging on in the press release, but you get the gist of it. Whitehurst will join the senior management team and report into Rometty, who seems to possess every senior management position worth having. IBM has been steadily increasing cloud as a proportion of total revenues and the pressure is now on to take that growth to the next level.

Indian companies to be punished for Huawei business

India is the latest country to be dragged into the US/China conflict as the threat of punishment is directed towards any companies who work with Huawei.

According to the Economic Times, any company found to be supplying components or products to Huawei, or any affiliated company on the US Entity List, could face regulatory penalties. Although the White House has focused on crippling Huawei through placing limitations on US companies, it seems the US Government feels it needs to spread its wings further.

“Any Indian company which will act as a supplier of US-origin equipment, software, technology to Huawei and its affiliates in entity list could be subject to penal action/sanction under US regulations,” said Telecoms and IT Minister Ravi Shankar Prasad in Parliament this week.

Although Huawei’s entry onto the Entity List, a list of companies which US firms are banned from working with, has had a notable impact on the Chinese firm’s business, it seems the consequences have not gone far enough. Huawei has suggested smartphone shipments will certainly take a hit, but the company is still functional, seemingly much to the distaste of US officials.

Last year, the US dropped an economic dirty-bomb on ZTE and it almost destroyed the firm. ZTE’s supply chain was unhealthily concentrated in the US leading to the distress, though as Huawei’s supply chain is much more diversified, the same action has not brought the same result.

Perhaps this is another step to add further distress to Huawei. If the US Government places restrictions on the companies who supply Huawei, irrelevant to their nationality, it might have a better chance of hurting the Chinese vendor.

That said, the impact on Huawei might just be a pleasant by-product of a dispute between the US and India. Like China, Mexico and Canada, India has got its own tensions with the US this time concerning data localisation.

Last month, rumours emerged that India would be the latest target of the US. India currently has laws in place which force foreign companies to store data on Indian consumers and businesses within the borders. There are other countries who have similar laws, but the US does seem to have some leverage over India.

H-1B work visas allow an individual to enter the US to temporarily work at an employer in a specialty occupation. Although there are no official quotas, it is believed Indian citizens account for as much as 70% of the H-1B work visas which are handed out each year. If localisation rules are not relaxed, the US has threatened to curb the flow of visas into India.

What will interesting to see is whether this is a strategy which is rolled out globally for the US Government. If it holds all of Huawei’s suppliers who use US components, products or IP in their products to account, there will be a varied list. This might be a strategy to further cause distress to Huawei, though we suspect it could also be used as a bargaining chip in the larger trade discussions.

NTT invests in the UK by combining several companies into NTT Ltd

Japanese telecoms and IT giant apparently didn’t get the memo that the UK isn’t worth investing in anymore because it’s basing an $11 billion business here.

NTT Ltd has been formed by combining networking and data centre company NTT Communications, South African IT services firm Dimension Data and the self-explanatory NTT Security into one great big IT firm. It actually brings together 28 different sub-brands in an act of consolidation that was clearly overdue and will employ 40,000 people in 70 countries.

The choice of London as the location of NTT Ltd’s headquarters is a timely endorsement of the continuing economic vibrancy of the UK. For the last few years UK politics has been dominated by Brexit and the insistence by those who want to remain part of the European Union that the UK is useless without it. This development will presumably be lamented, or at the very least ignored, by them.

“Going forward, we will accelerate our execution as one NTT in order to contribute to a smarter and better world through digital transformation,” said Jun Sawada CEO of NTT Corporation. “We are also excited to confirm that our global headquarters for NTT Ltd will be in London and that our commitment to the UK remains extremely strong.

“We considered several locations as the headquarters for NTT Ltd and made a deliberate decision to choose London. It has many benefits, including a stable economy, wealth of skills and talent, diversity in population and thinking, strong infrastructure, schools and housing for global talent moving to the city. In short, it’s a great city to live and work in, and we’re excited that we are making it the home for our new business.”

The broader significance of such a strong endorsement of the UK economy was not lost on the government. “Britain has a long standing and proud reputation as a global tech leader and it’s fantastic that NTT Ltd. has chosen London for its global headquarters,” said Prime Minister Theresa May. “A key part of our modern Industrial Strategy is to put the UK at the forefront of the tech and data revolution, and they will join many other world-leading companies who call Britain home.”

This move first been announced last year, with NTT Ltd to be run by the former CEO of Dimension Data Jason Goodall, perhaps indicating a particular focus on Africa. The broader narrative, however, is the tried and tested ‘end-to-end solution provider’ one, emphasising the increased blurring of the line between telecoms and IT. Here’s a vid to show how serious they are about it.

 

Trump makes minor Huawei concession following pleading from US tech sector

Following talks with the Chinese leader, US President Trump has announced US companies will be able to flog Huawei some gear if they really must.

It looks like Trump got the memo that the collateral damage from his decision to ban US companies from doing business with Huawei was starting to mount up. As part of trade talks with Xi Jinping Trump announced on Twitter, as it his wont, that US companies can resume selling Huawei stuff, so long as it doesn’t cross some arbitrary, unspecified ‘national security’ line.

Here’s Trump making it official.

It doesn’t look like there was significant progress on the underlying trade war that seems to have at least had an amplifying effect on the Huawei situation, but at least the two leaders are talking and making the right public noises. The mutual decision not to impose further tariffs, as had been threatened in advance, is one positive sign, but it looks like the final resolution for Huawei remains closely tied to the broader talks

That said the Trump administration has been keen to counter any perception that this concession amounts to a more general weakening of the Trump position. Speaking to Fox in the clip below, Director of the US National Economic Council Larry Kudlow didn’t really add much on Huawei, but made it clear that the move is part of a general process of horse-trading in which each party makes small, symbolic concessions to show good faith.

 

Silicon Valley rallies against Washington over China tariffs

‘Make America Great Again’ might be the slogan pinned to anti-China aggression from the White House, but Silicon Valley is creating a tsunami of discontent against the short-sighted policies.

The Office of United States Trade Representative (USTR) has opened up for public comment regarding a new wave of tariffs to be placed on Chinese exports. While this will generate additional income for the US Government, anyone who believes these actions will not be reciprocated by the Chinese Government is probably fooling themselves.

For months, President Donald Trump has seemingly held a belief he can do whatever he chooses without repercussion, and the industry has largely stood-by with little action or objection. But no-longer, the list of comment submissions is growing by the hour, and there are some pretty big names to take notice of.

In one statement, Intel, Microsoft, HP and Dell Technologies have jointly submitted an opinion suggesting the laptop industry will be under-threat. The team point to price increases for US consumers and businesses, while also claiming the action would weakening the competitive edge these companies have on the international market.

“At the same time, the imposition of tariffs on such products would not address the underlying Chinese trade practices that USTR’s investigation seeks to remedy,” the submission states. “Instead, the tariffs will harm US technology leaders, hindering their ability to innovate and compete in a global marketplace.”

Price is of course a concern to these businesses, as the consumer electronics segment is one which operates under the cloud of low margins and high costs. With the threat of Chinese retaliation on the horizon, costs could be about to soar. With this in-mind, the team would the proposed tariffs to be amended with a horde of exemptions.

And when there are increased costs, there are fewer profits and therefore less money to spend. The jobs category is one which could be under-threat.

“While we appreciate the Administration’s efforts to address longstanding issues the software and other innovative industries face in China, we are concerned that the proposed modification will significantly and negatively impact economic growth, jobs, and innovation,” said Tommy Ross, Senior Director of Policy for The Software Alliance. “The proposed tariff increases will raise costs and reduce competitiveness across the international software industry and beyond.”

According to Ross, the software industry employs 2.9 million US citizens directly, while supporting a further 10.5 million indirectly. The tariffs threaten profitability and the ability for the firms to hire. This may well have a negative impact on growth as well as innovation.

On the handsets and devices side of things, there are of course numerous comments from a range of different parties. John Shane of Fitbit is requesting the USTR remove HTSUS

subheading 8517.62.0090 from the tariff list, as this would cause economic harm to his firm and its competitors, while also having the perverse effect of advancing primary Chinese

objectives under Made in China 2025.

Roku is another which has objected, suggesting Section 301 could negatively impact its ability to capitalise on the opportunity it has with the Roku Operating System. Roku has emerged as somewhat of a challenger to the traditional TV market, with 54% of Roku users not utilising traditional linear TV. This is an emerging segment, though Jim Lamoureux argues the tariffs would inhibit innovation and impact Roku’s ability to lead globally in this potentially profitable segment.

This is the greatest danger of the USTR actions against China with these tariffs; retaliation from the Chinese Government might ensure the damage inflicted on US firms and the prospects of the wider US economy in the international markets would exceed the benefits.

Then you have to consider the impact the White House’s actions will have on allied nations.

“While the USTR has a vital role vis-àvis China, the proposed tariffs could unwittingly affect products made by American, European, Japanese, South Korean, Taiwanese firms and firms from countries of non-offending origin – the very countries with whom the US wants to strengthen trade going forward,” said Roslyn Layton of the American Enterprise Institute.

In her comment, Layton has voiced support for the actions, though seems to encourage more thought when it comes to the law of unintended consequences. Layton seems to be encouraged by firm position the USTR is taking in opposition to China but questions the effectiveness of its current path.

You have to wonder how much collateral damage the US Government is prepared to stomach in its crusade against China. We strongly suspect it does not care in the slightest that a firm of a couple of hundred people are negatively impacted, NeoPhotonics has been crippled by losing Huawei as a customer, but when the tech giants start to get twitchy politicians might start taking notice.

Layton also pays homage to the international allies of the White House. Trump has not exactly been collecting compliments on his diplomatic strategies over the last couple of years, and should the tariffs directed at China have negative impacts on its trade partners, we can imagine strained relationships would be put under further pressure.

All of these businesses are requesting exemptions from the tariff list, but also question the logic behind the decision. There is going to be collateral damage and friendly-fire, though you also have to question whether the strategy is going to satisfy the desired aims.

What is also worth noting is that we are only focusing on the technology segment here; there are more than 2,000 comments so far on a very wide range of topics, industries and verticals. A large number of these submissions are calling for exemptions on the products, components or services which are deemed critical to their work. We suspect if you go through every comment, every item on the tariff list will be mentioned by someone, somewhere.

There are still a flood of questions and concerns which need to be addressed by the USTR, though one which we are interested in is who the US Government will choose to wear the collateral damage. Some exceptions will be granted, and some requests will be ignored. The USTR has to decide which industries to protect from the trade-war and which are going to sacrificed for ‘the greater good’.

Dish said to be close to buying Boost from Sprint

The disposal of assets required to sugar the pill of the T-Mobile/Sprint merger looks likely to be completed by US cableco Dish.

The latest goss comes from Bloomberg, which has been chatting to people who reckon they know what they’re talking about. These mysterious oracles say Dish is ready to drop $6 billion on prepaid operator brand Boost as well as a bunch of other unspecified stuff.

Since Boost has been valued at around $3 billion that’s quite a lot of unaccounted for expenditure. Since US regulators would ideally like a new national operator to be created before it will allow two of them to marge, this probably means some spectrum and whatever else Dish needs to become a viable MNO.

Apparently the WSJ had written a similar story last week so these telecoms Deep Throats are being nice and busy. Presumably they’re affiliated to the interested parties in some way and are floating trial balloons to see gauge broader sentiment on such a deal. None of the share prices of the companies concerned did much in response to the revelations.

Light Reading has reported on commentary from an Analyst who doesn’t think this is a great idea. He notes that it looks like a lose/lose since it takes spectrum away from TMUS/Sprint and cash away from Dish, in both cases depriving them of commodities they’re already short of. But big M&A usually ends up being about the egos of the big shots involved and if all those concerned fancy the idea they’ll probably go ahead regardless.